Monday, December 15th, 2008 at 6:37 PM
Say What?
from sddt.com
The status of the economy, banking, residential and commercial real estate were discussed during an Institute of Real Estate Management Forecast at the Hyatt Aventine La Jolla last Friday.
Hans Ganz, president and CEO, Pacific Trust Bank, said the dilemma for the lender is that while a home might have been purchased for $1 million, it is going to be valued by the current comparables in the area. Values have almost universally declined. Add to that a couple of foreclosures in the area and that $1 million home may be suddenly worth $600,000 — more than eliminating any equity. “Now where is the incentive for the lender to refinance that home?” Ganz asked.
Save for refinancing, Ganz does believe mortgage lending will soon be assuming a more normal pattern, however. “We’ll start seeing upturns by the middle of next year. The money isn’t going to stay on the sidelines very long,” he predicted. Ganz said this is an excellent time for real estate investors, and made a prediction. “More millionaires will be made in 2009 than we’ve seen in many years.”
Although it has been said before, UCLA Anderson School of Management professor and economist Stephen Cauley also said with home prices low and interest rates low, there has never been a better time to buy a home.
“This may be a once in a lifetime opportunity,” he said.
Stath Karras, a Cushman & Wakefield executive managing director, meanwhile said the multifamily market is being strengthened on numerous fronts. Karras said he is already noticing that more people are doubling up in apartments than before this latest downturn. “You have demand from echo-boomers, defaulting homeowners entering the rental market, and people who can’t qualify for a home having to stay in the rental market. What’s not so good for apartment investors is we still have a lot of vacant condos out there,” he added.
If he is uncertain about anything, Karras said it is what the impact will be “of all those empty houses” that are being foreclosed upon. “A lot are being purchased for rental purposes,” he said. While rents have managed to hold their own thus far, Karras predicted there will be some softening both due the houses being rented and the overhang of the condominium market. Karras said the good news is he expects the capital markets to come back mid- to late 2009.
Cauley, while conceding that he doesn’t know what will happen next year, said there is a 60 percent chance the recession will be short-lived and commercial real estate markets will be all right. “Another possibility (about 20 percent) is there will be little or no economic growth. This would mean a series of recessions _ a kind of slow death,” he said.
“And there is a 20 percent chance we could have a long-term recession or depression _ yuk,” Cauley continued. All that said, Cauley, believes that Sen. John McCain was right when he said ‘the fundamentals of the economy are strong.”
“To be sure those fundamentals have been submerged, and there has been an implosion in the credit markets, but the strength is still there,” he said.
Mark Read, a CB Richard Ellis (NYSE: CBG) senior managing director, who quipped that people’s 401 Ks are now 201 Ks, noted that the commercial real estate had an unprecedented five-year run and it’s only natural that it would taper off anyway. Still, he admitted times may be tough for a while. “If you want to know what’s going to happen with commercial real estate, just look at job growth,” Read said.
Unemployment, plus or minus 6.5 percent here with some predictions it may reach 7 percent, seems to be going in the wrong direction. Other realities may impact the commercial market.
“You have owners who bought in ’05 or ’06 or ’07 who have buildings worth 15 to 20 percent less than they paid for them,” Read said. He predicts this unsettled market will last at least through the first half of the year, and there may be further company consolidations and mergers along the way.
Read added the strong commercial real estate brokerages will survive the downturn, but to do so some may have to outsource many of their real estate functions along the way to keep the costs down. For commercial property investors, as is the case in residential, he said “there are some incredible deals out there.”
“And on the other side, this is a great time to be a tenant,” Read said adding that incentives such as free rent and generous tenant improvement allowances may be particularly attractive right now.
Posted on Monday, December 15th, 2008 at 6:37 PM in Psycho-babble | 17 Comments » | 
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“We’ll start seeing upturns by the middle of next year. The money isn’t going to stay on the sidelines very long,” he predicted. Ganz said this is an excellent time for real estate investors, and made a prediction. “More millionaires will be made in 2009 than we’ve seen in many years.”
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Oh yeah, all these rich RE investors are going to come out of the woodwork to save the RE market -LOL!
This Ganz guy has his head up his arse.
Housing prices MUST come down enough so that the average middle income earner/family can afford it. This is the ONLY thing that will bring back the RE market. Sorry, but this won’t happen for quite some time because jobless claims are going to increase drastically well into 2009.
It’s pretty simple… No job = no money = no credit = no house.
JAP | December 15th, 2008 at 7:55 pmTalk about living in on Fantasy Island….First up, our new president will have to stop global warming, build electric cars in Detroit, get out of the Middle East, rebuild all the schools, roads, bridges, slums, and create 5 zillion jobs, and keep people in their overpriced homes. San Diego commercial and residential real estate is not on the list. Washington will fix this….trust me…..LOL!
BottomFisher | December 15th, 2008 at 9:00 pmHere is a five sided die. Roll 1 and it’s a depression, roll anything else and you will be a millionaire.
I’ll take that bet. What? You aren’t guaranteeing anything? Why am I not surprised?
You can smell the desperation. Why can’t we see the desperation prices?
Rob Dawg | December 15th, 2008 at 9:05 pmI must admit, as a grad of UCLA I am sometimes ashamed of the forecasting from its b-school. It seems pretty clear to me that the b-school is very dependent on realestate industry contributions and never willing to state the truth but spin what it donors want to hear.
Of course the Anderson forecast also never predicted the down turn.
I hope the b-school faculty are reading blogs and are realizing if they keep the practice of spin for their donors over good research, all credibility will be lost.
Bob | December 15th, 2008 at 9:27 pm“There has never been a better time to buy a home.” Why does this keep sounding like deja vu? All the people saying this deserve to buy a house and profit from their own genius.
In other news, Goldman Sachs predicted $200 barrel oil and has now revised their prediction to $40. Meanwhile dozens of top economists deny there is a recession, only to be followed up with an official declaration of a recession since the last 12 months.
Anyone see a pattern here?
BDiego | December 15th, 2008 at 10:02 pmI want to smoke some of whatever Hans Ganz is smoking. It has to be some great stuff!
greenlander | December 15th, 2008 at 11:17 pmOf course the Anderson forecast also never predicted the down turn.
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Actually, they were one of the first. From mid-2002:
In a report titled “Bubble Trouble,” Edward E. Leamer, director of the UCLA Anderson Forecast, compares the current recession/recovery to the nine previous recession/recoveries since 1950. Picking up on a theme first introduced in the March report, Leamer asserts that the nation is in the midst of the first “business cycle.” The previous nine cycles have been “consumer cycles” driven by downs and ups of consumer spending, particularly on housing and cars. The recession of 2001 was caused by reductions in business spending. Consumers, however, continue to spend on housing and cars.
“They [consumers] are buying homes and cars and shirts and shoes with a religious intensity suited to a celebration of the genuine arrival of the Nirvana Economy,” Leamer said.
Leamer does wonder if consumer spending can continue to prop up the economy while business continues to recover from the profits-be-damned investing common during the Internet Economy. To that end, the report contains a detailed analysis of the “p/e ratios” of personal real estate investment, invoking a pure business analogy to examine the hot California real estate market. The analysis puts to rest the myth that a California housing shortage means that prices of California homes can only go up.
According to Leamer, the greatest risk for a “double dip” comes from the housing market, but financial conditions continue to be highly favorable for continued housing investment. Absent a housing collapse, the U.S. economy looks good, but not great for 2002 and 2003. Leamer does warn that factors such as rising mortgage rates and weaker home appreciation could cause a significant drop in housing investment and possibly a second dip.
http://www.uclaforecast.com/contents/archive/media_6_02_1.asp
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As we approached the peak of the bubble, something at UCLA changed, and they started discounting the problems in the housing sector. Ed Leamer (not Chris Thornberg, as is often believed) is the one who was signaling problems with the “P/E ratio” for housing in the early years of the bubble. Something political happened there around 2004, IMHO.
CA renter | December 16th, 2008 at 2:02 amWhat meaningless drivel. UCLA should be ashamed of itself.
But, I suspect that as long those checks cash, we’ll more about all the new millionaires coming next year.
ice weasel | December 16th, 2008 at 5:41 amOne thing is for sure you will never make any real money when real estate is seen as a safe investment.Buy when the others are in panic and wait it out.I think there are some good buys in the market now.Some properties cash flow positive.Do your homework.I think a lot of people are waiting for the bottom so good luck picking it.
arizonadude | December 16th, 2008 at 5:59 amCA Renter, they were over-projecting the 2001 bubble there and they were flat out wrong. If this was actually relevant, then fine I predict the next recession from today. We’re headed there!
I’ll be proven right in 6-8 years.
BDiego | December 16th, 2008 at 11:20 amInteresting how in the same article they said it was a great time to buy a property for rental purposes and then they said it is great to be a renter and take advantages of incentives like free rent.
Things that make you say hmmmmmm
LV Renter | December 16th, 2008 at 11:36 amThe real problem that forecasters have yet to get out in front of is the declining spiral of private credit availability. I mean, lots of people know there’s a credit crunch currently, but most people base their assumptions on the credit situation improving, or at least not getting worse. Unfortunately, the government is giving banks strong incentive to stay away from the private lending business in the near future, with lots of new regulations and restrictions on collecting collateral from defaults. This will cause the credit market to get tighter in the next year, with spill-over into auto credit, credit cards, credit lines, etc. It’s clearly not a liquidity problem; it’s a free market (or lack thereof) problem.
Imagine what happens when you have the government-created perfect storm of enormous existing private debt and no private refinancing, revolving credit, or new credit available. If you think we have a demand decline now, wait until the government gets a bit further along in their efforts to destroy private credit in the name of consumer protection… then the markets will get very interesting.
Nick | December 16th, 2008 at 2:54 pmCA Renter, they were over-projecting the 2001 bubble there and they were flat out wrong.
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We can quibble about the details, but IMHO, they were right…and early. Nobody could have predicted the kinds of lending practices that became rampant in 2003-2007.
Based on historical trends and economic conditions at the time, 2001 would have been a housing cycle top **in normal circumstances** and prices would have dropped from there. The price movements from 2001 onward were 100% fueled by the credit bubble, IMHO.
Ed Leamer will be proven wrong IF we see inflation-adjusted prices remain elevated above 2001 levels. In many areas, we are already at or below 2001 levels. It just takes time for the higher-end areas to catch up. Slinky…
CA renter | December 16th, 2008 at 3:48 pm“Based on historical trends and economic conditions at the time, 2001 would have been a housing cycle top **in normal circumstances** and prices would have dropped from there.”
This actually did happen up north in Silicon Valley. Prices peaked in 2001 and slumped in the post-dotcom economy, and there was actually a period in 2003 when you couldn’t get back what you had paid for a house in 2001. Then things took off again in 2003 as the credit bubble inflated.
The SF Bay Area is largely built-out for SFHs and there’s not much of a military spending component to the local economy, so there was not much of a new house construction boom and it was mostly all condos and resales.
GeneK | December 16th, 2008 at 4:14 pmGene,
If you look at sales and price trends, you’ll see the slowdown happened down here, too. I believe other leading cities (the big cities that tend to lead price movements) were also slowing down.
This is why I’ve always stated that housing prices would reach pre-2001 levels (inflation-adjusted). All the price growth after that was artificial, IMO.
CA renter | December 16th, 2008 at 9:50 pmYes, I’ve said that as well. Housing booms prior to 2003 were mostly based on something happening in national or local economies other than housing, such as tech cycles, military spending, etc. 2003-2006 was an attempt to fool people into thinking there was growth going on when there was none, and was almost entirely stimulated by cheap, unregulated money coming out of the Fed. The unfortunate difference between the bubble and more “normal” economic boom/bust cycles is that unlike a tech boom, where products generate future growth because they need to be replaced in a few years, or military spending that will come again because the world always seems unable to avoid another war somewhere, the bubble’s white elephant houses will be hanging around the market’s neck like an albatross for decades to come.
GeneK | December 17th, 2008 at 7:19 amDrinking Jim Jones Guyana flavored cool aid. Jim I know you spit it out!
Coconutz! | December 21st, 2008 at 7:36 pmCoconutz!